Gig economy faces shakeup after California high court ruling

CAROLYN SAID – San Francisco Chronicle, May 7, 2018 | Berkeley’s Aaron Powell may be the consummate gig worker.

He drives his electric Volkswagen Golf for Uber, Lyft, Postmates, DoorDash, Caviar — “anything that might give me a step up,” he said. “I just pick whoever is paying the most money at the time and do that one.”

He likes the flexibility that lets him switch between watching his toddlers and working 12-hour days.

But still, he thinks he should be an employee, especially with Uber and Lyft whose policies often force him to accept riders with low ratings and dictate what he makes, he said.

“If I don’t have any choice of who to pick up and how they’re being charged, then why am I an independent contractor?” he said.

After a groundbreaking ruling last week by the California Supreme Court, Powell and other drivers — as well as millions of other gig workers in the state — may in fact become employees. It’s a seismic change that could up-end the app-driven gig economy, the new sector that has created flexible ways to earn money but drawn fire for bolstering a new class of precarious work that lacks social safety-net benefits.

Gig companies rely on independent contractors because they’re a lot cheaper than employees, whose benefits add at least 30 percent to labor costs. Uber and Lyft and their ilk don’t have to buy cars or pay for fuel, insurance or maintenance. They can quickly scale up their labor force — and if need be, scale it down without layoffs.

While using independent contractors gives companies an edge, California’s high court said it was an unfair competitive advantage.

The high court used a streamlined test to distinguish between employees, who are entitled to minimum wage, overtime pay, workers’ compensation, unemployment coverage and business-expense reimbursement, and independent contractors, who receive none of those benefits.

Under the so-called ABC test the court used, workers are employees if their tasks are central to a company’s mission. Giving rides for a transportation company like Uber or Lyft would seem to fit that bill, meaning drivers could be reclassified as employees. But someone whom Uber hired to fix a pipe at its headquarters would still qualify as an independent contractor, since Uber is not a plumbing company.

“The gig economy gets into trouble (with the ABC test) because the services provided by their contractors are at the heart of their businesses,” said Felicia Reid, a partner at San Francisco’s Hirschfeld Kraemer, which represents employers in labor disputes. “The gig worker provides the services that the company exists to sell in the marketplace.”

Even the way most gig companies are structured, in which they bill customers and then pay a cut to contractors, will be suspect under the new approach, she said. “The revenue comes in to the company, not the gig worker,” Reid said. “That’s a problem” for the companies’ arguments that the workers are independent contractors.

Uber declined to comment. Lyft said it was still reviewing the decision. TaskRabbit, a marketplace for home repairs and odd jobs that is owned by Ikea, declined to comment.

“If I were a gig economy employer, I would be thinking long and hard about how to conduct my business going forward,” said Beth Ross, a partner in Oakland law firm Leonard Carder, who’s fought — and won — to have FedEx drivers and Amazon delivery drivers reclassified as employees. “The ABC test is a clear, simple, bright line that removes all the little nuances that gave employers the opportunity to argue that workers are not employees. If doesn’t matter if you are part time, if you are casual, if you set your own schedule.”

While the court’s ruling will hold sway in California, don’t expect an overnight shift. Companies could proactively reclassify workers to avoid future penalties, but it’s more likely that changes would come in response to legal actions by workers or state authorities, a process that could take months if not years. Massachusetts and New Jersey use versions of the ABC test but their Uber and Lyft drivers have not been reclassified.

But workers who feel they’re entitled to compensation for overtime and business expenses will be motivated to file cases. And both state and federal tax payroll audits look at employee classification, Reid said.

The earliest changes to an employee model may come at smaller firms with fewer resources for legal battles as well as new startups, experts said.

The ABC test “will provide much stronger worker protections and make it extremely difficult for companies to classify their workforce as independent contractors, as many employers have been trying to do, and unfortunately many courts have allowed them to get away with,” said Shannon Liss-Riordan, a Massachusetts attorney who has filed lawsuits against Uber, Lyft, Postmates, DoorDash and Grubhub, arguing that their workers should be employees.

While most of her cases are snared in settlement talks, the first one to go to trial ended in February with a win for Grubhub. U.S. District Judge Jacqueline Scott Corley agreed with the company that its workers were independent contractors since they set their own hours. Now Liss-Riordan plans to remand that case back to the district court to apply the new test, she said.

A stumbling block for quick change is that Uber, Lyft and most gig companies require workers to agree to mandatory arbitration, which forces them to pursue individual actions and blocks them from filing class actions. But Liss-Riordan said she’s eager to represent drivers in arbitration cases, and other attorneys said such cases may be resolved more quickly now — in workers’ favor.

What could happen, Ross said, is that plaintiffs’ attorneys will seek out workers to pursue individual arbitrations over classification. As the cases mount, eventually they could have a snowball effect with companies deciding to switch their business model to having employees.

“At a certain point, it could be a very expensive proposition for an employer to have to defend the same cases over and over and over again,” she said. “Even though arbitration cases are confidential, word inevitably gets out.”

Both Reid, who represents employers, and Ross, who represents workers, said their firms have received plenty of inquiries in the few days since the California ruling.

Most drivers say they prefer to remain independent contractors, said Jianming Zhou, co-founder and CEO of San Francisco’s SherpaShare, which helps gig drivers track their earnings and expenses. Changing that “might make a lot of people unhappy,” he said. Drivers relish the freedom of deciding when and how much to work. “If they become employees, the company will tell them when to work,” he said.

Not so, said Scott Absher, CEO of gig economy company ShiftPixy. The Irvine firm arranges on-demand jobs in restaurants, hospitality, landscaping and janitorial through an app. It has used an employee model from the get-go.

While employees often offer certain shifts, such as four hours on Tuesday afternoon, “workers can pick and choose their schedules and do it on short notice,” he said.

“For people who do this type of work, we bring stability,” he said. “If they get hurt on the job, they are covered by workers’ comp. You can be a digital platform and be compliant with labor laws.”